Back to School Tax Time

Now's the time of year when kids across America start heading back to school. New kindergartners eagerly don their snazziest big-kid outfits to pose for smiles and pictures. (The tears come after they get dropped off. We're talking the mom and dad, of course.) New high-schoolers hit the snooze button and look forward to sleeping through morning classes. (Why yank teens out of bed so early when their younger siblings are up before sunrise without alarms?) And new college students can't wait for the independence of campus life, because = beer. (Their empty-nester parents wonder if it's finally time to treat themselves to that divorce they've always wanted, then look at the tuition bills and sigh in disappointment.)

You know who else is busy this time of year? That's right, the tax man! Here are some random musings on some of the things that happen when back-to-school time meets tax time:

• Many states offer sales tax holidays for back-to-school shopping. Ohio is typical: from Friday, August 5 through Sunday, August 7 (2016 only), there was no tax on clothing priced at $75 or less, school supplies priced at $20 or less, and school instructional materials priced at $20 or less. Of course, those back-to-school sales tax holidays are just like your old homework assignments — you can't get credit if you miss the deadline!

Teachers are naturally on the front lines of shrinking school budgets, and they often chip in with their own money to fill the gaps. (Ironic, right, considering how generously they get paid!) The Educator Expense Deduction lets teachers who work full-time at any accredited school deduct up to $250 they pay for books, school supplies, computer equipment and software, and even athletic equipment they buy on behalf of their students. For years, this has been one of those deductions Congress scrambled to extend every December — last year, Congress finally gave our kids' long-suffering teachers a break and made it permanent.

Student loan debt has topped a trillion dollars, and loan forgiveness programs have sprung up to help borrowers who go on to work for qualifying employers like governments and 501(c)(3) not-for-profits. But those service-minded borrowers may face an unexpected surprise: sometimes the amount forgiven is considered taxable income! Sure, eliminating, say, $40,000 would be welcome relief for a hardworking teacher or social worker. But what about the $10,000 tax bill that comes with it?

You probably wouldn't think a college degree would be tax-deductible. And there's no deduction for training that prepares you for a new job. But if your graduate program is intended to improve or enhance your skills for your current job — or if your employer requires you to get an advanced degree — you may be able to deduct your tuition and other expenses. Let's say you're a tax lawyer, and you want to brush up on your skills. That $40,000 you drop on a Master of Laws degree may get you a raise and a deduction. (Now you know why tax lawyers drive Jaguars!) Here's today's lesson — pay attention, because there will be a quiz. When it comes to taxes, school is never out! The more you know and the more you plan, the less you'll waste on taxes you don't have to pay. So call us before exams and let us help with the tutoring you need!

Go for the Gold

For awhile there, it looked like the just-concluded Rio Olympics would be a carnival of chaos. Golfers boycotting to avoid the Zika virus? Check. Swimmers making their way through raw sewage? Check. And those were just the disasters we anticipated before the opening ceremonies! Who could have predicted divers splashing into a pool of green water, or Ryan Lochte "over-exaggerating" making up a whopper about a drunken robbery?
In the end, it all worked out, and we got to witness the usual quadrennial spectacle of sport, livened with a dose of Latin color. Swimmer Katie Ledecky earned five gold medals and, in one race, beat a woman on a jet ski. Gymnast Simone Biles is headed for the cover of Sports Illustrated and has gone viral with her quote, "I'm not the next Usain Bolt or Michael Phelps. I'm the first Simone Biles." And none of Rio's projected shortfalls disrupted the spirit of competition.
Olympic games are full of upsets, disappointments, and uncertainty. But there's one team that's always guaranteed to win, and that's the team at the IRS. They're not taxing winners on the value of their medals, at least not yet. But the U.S. Olympic Committee awards cash prizes to U.S. medalists: $25,000 for bringing home the gold, $15,000 for the silver, and $10,000 for the bronze. Uncle Sam's teams finished #1 in the medal race, combining for 46 golds, 37 silvers, and 38 bronzes. That means over $2 million in new income to tax!
How do those cash awards compare with our competitors across the globe? Well, we're nowhere near #1 in that race, for sure. If you live in Azerbaijan, bringing home the gold puts the Azerbaijani equivalent of 510,000 pretax dollars in your pocket. (We're not sure where you can actually spend $510,000 in Azerbaijan, but men's taekwando champ Radik Isaev probably can't wait for the challenge.) If you live in Russia, and you aren't disqualified for doping, bringing home the gold means an extra $135,000. Thailand's Sopita Tanasan, who dominated the women's 48kg weightlifting competition, will enjoy a $314,000 annuity to be paid out over the next 20 years.
Of course, the keepsie money isn't in the prizes, it's in the endorsements. Swimmer Michael Phelps cemented his Olympic legend by breaking a 2,168-year-old record for most individual medals. (Leoniodis of Rhodes, the previous record holder, had to win a footrace while carrying a 50 pound shield and wearing a complete suit of armor.) Phelps has won "just" $1.9 million from his actual swimming. But he's parlayed his fame into $94 million of taxable endorsements and a $55 million net worth. Maybe there's really something to that "cupping" nonsense?
Winning at the Olympics can open doors we can't even imagine yet. Consider this theory. In 1976, a young Bruce Jenner packed up his hopes and dreams and headed to Montreal. What if he gave it his all in the decathlon and finished . . . fourth? No medal, no Wheaties box, no Playgirl cover. Would we be keeping up with those krazy Kardashians today? (And for that matter, which of today's stars will be headlining a reality-TV train-wreck while we're watching the 2056 games?)
Here's the final result. Planning for one-time windfalls (like Olympic gold) can be just as important as planning for periodic income (like endorsements). The IRS wants a piece of it all. So call us before you earn your medals and we'll help you make the most of your gold!

Up in Smoke

The Mafia. The Mob. La Cosa Nostra. Call it what you will, this "certain Italian-American subculture" has a long and storied history. Mobsters like Al Capone, Henry Hill, and John Gotti have become folk heroes of a certain sociopathic sort. Fictional mobsters make special guest appearances alongside pop culture icons — witness The Simpsons' "Fat Tony" D'Amico, crime boss of Springfield.
Organized crime also has a long history of tangling with tax authorities. Try as they might, Elliot Ness and his fellow "Untouchables" couldn't jail Al Capone for bootlegging, bribery, or the St. Valentine's Day Massacre. It took IRS agent Frank Wilson three years of dogged investigation to finally put Capone behind bars for the pedestrian offense of failing to pay his taxes. Even Tony Soprano knew enough to report a salary from his waste management business to keep the IRS off his back.
Earlier this month, the Mob was back in the news as the FBI unsealed an indictment and arrested 46 members of various New York and Philadelphia-area crime families. The suspects sported the usual collection of colorful nicknames like "Tony the Wig," "Anthony the Kid," "Tony the Cripple," and "Mustache Pat." But their actual crimes seemed a far cry from the wars that defined the Mob's glory days. While the indictment included old-school staples like gunrunning, loansharking, and bookmaking, it also featured "participation trophy" offenses like health care fraud, credit card fraud, and selling untaxed cigarettes.
Cigarette smuggling might sound like a penny-ante crime, especially compared to the whacking, kneecapping, and "protection" rackets of mob legend. ("Nice business ya got here. Be a real shame if anything happened to it.") But the Bureau of Alcohol, Tobacco, Firearms, and Explosives estimates that black-market smokes cost governments $5 billion per year. In New York, where the tax is $4.35 per pack, an estimated 57% of all sales involve smuggled cigarettes. And every time the tax goes up, so do the incentives to smuggle.
How does the scheme actually work? Simple arbitrage. Buy your cigarettes someplace cheap like Virginia, where the tax is just 30 cents per pack. Truck them up I-95 to New York City. Sell them at a discount to bodegas and other independent retailers. Then conveniently "forget" to tell the tax man about it. Smugglers generally make between $4 and $6 per pack. That means a single truckload, which contains 48,000 cartons, can light up nearly $3 million in profit.
Numbers like that make "bootlegging" so attractive that terrorists have fired up their own efforts. The 1993 World Trade Center bombing, in fact, was financed by cigarette smuggling. In 2002, a federal jury convicted a Lebanon native of smuggling cigarettes from North Carolina to Michigan to funnel profits for Hezbollah. And investigators believe that European cigarette smugglers help pay for ISIS's reign of terror, too, both in the Middle East and throughout Europe.
Here's the lesson from today's sad story of Mob decline. Every financial move you make involves at least some tax consideration. Now, snuffing out those taxes shouldn't be your sole priority. But once you've made the right financial choice, your next step should be to find the most tax-efficient way to do it. That's where we come in. So call us for the plan you need, and watch those unwanted taxes go up in smoke!

The Darker Side of Reality TV

Americans can't seem to get enough of reality television. Most critics think that's because reality TV presents us as we all aspire to be. Something about the camera seems to bring out the best in people, whether they're bachelorettes, drag queens, or cake chefs. Reality TV is where we go to restore our faith in the simple human dignity in everyone, from hoarders to pawn stars to ice-road truckers. (Right?) Besides, what kind of masochist would voluntarily waste an hour of their precious life watching a gaggle of "real housewives" fighting like a sack full of drunken cats?
That's why it was so disappointing to hear that Abby Lee Miller, star of Lifetime's Dance Moms, has pled guilty to federal tax fraud and money laundering charges. It's a bit like finding out the mighty Wizard of Oz is just a little man behind a curtain. (Think of the children!)
If the Kardashians are the bright shining sun of the reality TV solar system, Abby Lee Miller is a minor outlying planet, or maybe a famous comet. Dance Moms has spent six seasons following Miller, her Pittsburgh studio, her dance team, and of course the dancers' moms. (We don't have to actually watch this stuff to write about it; the show even has its own Wikipedia page.)
Miller may be a whiz at choreographing routines like the one highlighted in "Topless Showgirls," featuring her preteen troupe performing a burlesque routine in flesh-toned bra tops and tights. (The show's producers mercifully pulled that episode from the season's DVD compilation.) But when it comes to business, she's got two left feet. In 2010, she filed for bankruptcy, claiming $325,000 in assets and $400,000 in debt. As part of that process, the court ordered her to do all her banking out of a single central account and file monthly operating reports disclosing her finances.
But Miller failed to disclose she would be profiting once her show debuted on July 14, 2011. In 2013, the judge supervising her affairs found himself channel-surfing one night and clicked onto Dance Moms. Naturally, he wondered why he wasn't seeing that income.
Miller could have cleaned up her act. Instead, she choreographed more scheming. She held on to checks to deposit them after her case was discharged, deposited money into hidden accounts, and asked customers to pay her mother instead of herself. And of course she didn't show that little pirouette to the IRS. How much are we talking? According to prosecutors, $755,492.85. That's a lot of sequined leotards!
Last October, a federal grand jury indicted Miller on 20 counts of fraud. For an encore, prosecutors added a money-laundering charge after discovering she and her employees had smuggled $120,000 in cash from Australia in Ziploc bags hidden in their suitcases. A week later, she pled guilty to one count of bankruptcy fraud and one count of not reporting an international currency transaction. Now she's looking at 24 to 30 months in a place where sequined leotards are in very short supply.
Ironically, Miller's cheating didn't save her anything — once the judge found her television gold mine, she wound up using it to pay her creditors in full! And that's the lesson of our story. Cutting corners and breaking the rules may seem to offer short-term relief. But survivors know that long-term planning is the key to financial success. So call us for help with your planning and enjoy some real world savings!

Like This!

If you're like most Facebook users, you get plenty of friend requests from people who aren't really friends. Co-workers you never respected from your last job; classmates you never really liked 30 years ago; annoying blowhards you meet at your in-laws' anniversary party. If you're lucky, you can just ignore those requests and hope they go away.

But sometimes a request is harder to ignore. That includes the friend request the IRS just sent to Facebook itself, in the form of a Statutory Notice of Deficiency, for $3-5 billion dollars. (Plus interest and penalties, of course.)

Here's the scoop. Facebook has 1.23 billion friends across the world. (Probably not too many more than you do, but who's counting?) That was enough for Facebook to make $3.69 billion selling advertisements last year. But who likes paying tax on all that income at the top corporate rate of 35%? So Facebook set out to edit its profile, at least where the IRS is concerned.

In 2010, Facebook transferred rights to some of its "online platform" and "marketing intangibles" to an Irish subsidiary. The Emerald Isle is a lovely place to do business — who wouldn't want to "make their green" in a place where the wearing of green is a thing? But Ireland's top corporate tax rate is just 12.5% — barely a third of our own. That difference lets Facebook license the intellectual property from its Irish subsidiary, deduct those license payments to save 35% here in the US, and pay just 12.5% on the resulting income in Ireland. Slick, right? Lots of companies have moved their intellectual property to Ireland, and by one study, this sort of profit shifting will cost the Treasury $135 billion in tax revenue this year. If you're counting, that's over 4% of our total tax receipts.

Facebook friended the accounting firm of Ernst & Young to assign a value to the assets it transferred. That's important because the lower Facebook values those assets, the less taxable income they have to bring back from the foreign subsidiary. At the same time, it's a difficult job because there's no real market for them. Who else besides Facebook could possibly use Facebook's marketing intangibles?

There's enough at stake that in 2013, the IRS opened an audit. They saw that Ernst & Young valued each of the transferred assets independently, rather than as part of an integrated whole. And they said this undervalued the assets by billions of dollars. But the IRS needed more information to calculate exactly how much. So they sent Facebook a series of "friend requests," in the form of summonses to produce documents and appear at the IRS's office in San Jose. The company ignored those requests just like you'd ignore a friend request from that drunk loudmouth you met at your spouse's company golf outing.

Last week, with the statute of limitations for the audit closing in, the IRS gave up on requesting information and just sent Facebook the bill. Naturally, Facebook will fight back in court. If they lose, it could cost them enough that investors stop liking their stock! Stay tuned for the rest of the story.

Here's today's lesson. Proper planning is key to keeping your tax bill down. But it's not enough just to plan. You have to implement, too. That takes work, and it means dotting your i's and crossing your t's. So call us for the help you need. Stop wasting money on taxes you don't need to pay. And post a picture for your "friends" to see what you do with the savings!